Betting on Reddit Stock: Should You Join the Bulls or Heed the Bears’ Warning?

Stock Market

Reddit (NYSE:RDDT) has been quite popular since its launch two decades ago. Indeed, 2023 was a mixed-bag of expectations for Reddit stock, especially when investors saw an $804 million revenue which was accompanied by a $91 million loss. Reddit admitted it was slow to monetize its platform, but expressed optimism about its business potential.

The social media platform stabilized after the IPO frenzy. After a month, RDDT traded between $31 and $34, soaring 40% to $74.90 before settling 20% higher. This volatility reflects uncertain market sentiment toward the platform known for its engaged user base.

The Bull Case for Reddit Stock

Wall Street analysts are assessing Reddit after its recent IPO. Despite early volatility, Deutsche Bank (NYSE:DB) initiated coverage with a buy rating and a $50 price target.

Analyst Ben Black highlighted accelerating growth, improved advertising, and the company’s potential in data licensing (particularly in generative AI applications), as reasons to buy this stock.

Reddit stock rose 3% after Deutsche Bank initiated coverage with a $50 price target. However, this target is still 33% below its all-time high. Despite Reddit’s solid revenue growth and potential AI partnerships, its lack of profitability makes it a high-risk investment.

Wall Street’s opinion on Reddit’s financial future is divided, with some predicting profitability within a year, while others disagree. Profitability is crucial for evaluating tech plays, especially those in the growth phase like Reddit stock, which can be vulnerable to market sentiment changes.

The Bear Case

Reddit aimed to connect its user base with financial markets through its Direct Share Program, offering IPO shares to users before January 1st, 2024. This approach may have increased retail investor loyalty, but the company’s long-term success depends on more than that. 

Reddit’s business fundamentals could be more challenging to gauge than its peers, partly due to monetization uncertainties.

Despite being the 8th most visited website worldwide, Reddit’s price-sales ratio is 8-9-times, similar to that of Meta Platforms (NASDAQ:META), despite its lower Average Revenue Per User.

While advertising is a crucial growth driver, questions remain about Reddit’s monetization strategy.

Unlike competitors like Meta, Reddit faces challenges in advertising because of its pseudonymous user base. To diversify revenue, Reddit secured content licensing deals with Google and Cision, worth $66 million annually, showing its commitment to profitability.

Reddit encounters post-IPO risks as its 180-day share lockup expiration approaches, potentially causing stock volatility.

Despite recent stock price moderation, it’s a good time for investors to evaluate company fundamentals. With earnings expected on May 7th, there’s anticipation and ample time for analysis.

Bottom Line

While IPO stocks offer excitement and profit potential, the fluctuations in Reddit stock dampens its bullish prospects, in my view.

Despite hopes for Reddit to have “next Meta” potential, careful comparison reveals stark differences. Buying Reddit stock now isn’t advisable – I’d be looking to take profits on any gains and be patient before adding a position right now.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.